Demand for London office space surges ahead

Office space in Central London also saw a strong increase, moving from a net balance of 17 per cent to 39 per cent. The main driver in demand appears to be from the financial services industry and ancillary professional service sectors looking to expand as their trading environment improves.

As available space struggles to keep pace with demand in London, interest from occupiers appears to be extending out beyond the capital. The South East was a significant beneficiary of this emerging trend, with surveyors reporting increased interest in office space, particularly from small to medium enterprises.

Nationally, tenant demand picked up at a quicker pace in Q1, with 10 per cent more surveyors seeing a rise in demand rather than a fall. Across all the regions, the net balance for demand was in positive territory, suggesting a broader recovery in firms’ appetite to increase their businesses.

However, for much of the UK, the rise in demand was insufficient to counteract increases in available floor space. As a result, expectations for rents continued their slide for the 14th consecutive quarter; with 13 per cent more surveyors expecting rents to fall rather than rise.

Only London bucked this trend, with rental expectations for the region increasing at the fastest pace since Q3 2007. Again, this is largely due to high levels of demand and shortage of available space in the office sector. In contrast, retail rents are expected to continue slipping, as are industrial rents – albeit to a lesser extent.

Respondents to the survey noted that rent levels had been affected by changes in empty property business rates. This is a particular problem where there are high levels of empty commercial space, such as in the Midlands and Wales.

Turning to the investment market, the sharp rebound in capital values seen in prime property over the last year or so also appears to be flattening off. Surveyors suggest that unwillingness by banks to lend at competitive rates is continuing to discourage investors, which is being particularly reflected in a depressed market in secondary property.

Across the South, Midlands and the North, capital values have now recorded consecutive negative readings since Q3 2007. London, in contrast, continues to be the only region to benefit from overseas investors appetite to invest.

Simon Rubinsohn, RICS Chief Economist said:

"London still appears to be where most of the activity, whether in the investment or occupiers markets, is taking place. This reflected in rising rental expectations especially in the prime office sector and a healthy recovery in capital values. The survey does encouragingly suggest that demand to take up space is growing outside of the capital but not at a sufficient pace to change the mood on the rental outlook."